From Business World of 27 June 2005.
The Ambani settlement
The merits of the dispute between Mukesh and Anil Ambani are of no practical consequence. None of the allegations made by Anil was probed, let alone redressed. And although Premchand Gupta said that enquiries will continue, it is quite unlikely that they will lead to any action. So it is pointless to waste space on the merits of the case.
Anil could not have had any illusions that his statements, letters and his calling on those in power from the PM to Patil would lead to any action. Why then did he carry out his relentless campaign?
The first part of the answer must be that he decided after four years of condominium that he could not work with Mukesh. The reasons are implicit in Anil’s letter to Mukesh of 25 October 2004, in which he described the way a reallocation of the powers of the chairman Mukesh and managing director, hidden in a misleading item in the supplementary agenda and carried against his opposition on 27 July.
Those who have sat in divided boards cannot be unfamiliar with these petty tricks. They are improper, and our voluminous company law forbids some of them. The government maintains a company law board to enforce that law, and the board is in the process of setting up numerous regional tribunals for judicial recourse. And yet, a moment’s thought on the grievances would show how inappropriate the legal framework is.
Where a board functions normally, the minutes would be sent to members by the secretary after the meeting, and if someone writes proposing a change, it would be incorporated. But suppose the allegations are as serious as Anil made, and the secretary ignores them. What redress does he have? Write to the Company Law Board? Approach a Company Law Tribunal? Go to Supreme Court? Wait ten years for a verdict? And what evidence can there be that he was right and Mukesh was wrong? It would be one man’s word against another’s – and probably against the word of many, in case the board was packed. Our legal machinery is hemorrhaeged; and even if it were not, legal redress is inappropriate for matters of corporate governance.
This is the conclusion to which American lawmakers came after the Enron disaster. They not only have a well developed company law, they have a huge and highly qualified Securities Exchange Commission to police it. But this could not prevent insiders from milking or ruining big companies. So the Americans changed tack, and in the Sarbanes-Oxley Act, opted for self-governance leavened by a strong presence of suitably empowered independent directors. SEBI recently opted for this model in the new clause 49 it wants inserted into companies’ listing agreements with stock exchanges.
I have earlier criticized Sebi’s move here on the grounds that companies will find board members who are independent in the sense defined by Sebi but are pliant to the demands of promoters. You can call someone independent, you can write down his qualifications, but you cannot free his mind. If his self-interest lies with the promoter, he will side with the promoter. My conclusion therefore is that in India, the law is an ass, and will remain an ass.
Although his diligent courting of those in power got him nothing, Anil still succeeded in the end. How did he do it? First, through skilful use of the press. His letters, meetings and statements were not only directed at those they were meant for. They were meant for the public, and were systematically released to the press. The press was scared stiff by the whole controversy: Reliance is known for filing extravagant suits for defamation against media that comment adversely upon it, so the media seldom dare open their mouths on its wrongdoings. But they were happy to carry Anil’s stories both because they were about Reliance and because they were scandalous.
And second through his impact on the financial markets. Reliance has always been a closely controlled company. There have at various times been news or rumours of improprieties, so the management has not had an impeccable reputation like the Tatas’. In the circumstances, allegations of impropriety carry credibility. And controlling stock of the company is owned by the family. So a dispute between the brothers could paralyze the company. The news was extremely upsetting for shareholders and lenders; the company’s valuation in the eyes of both went down. Mukesh had a sympathetic board and could steamroll Mukesh in management. But he could not quell market fears of dissension leading to poor performance. So he finally saw it in his self-interest to settle – and to give Anil what seems to me a generous settlement. Such is the power of the press, and of the stock market.